Baldwin Bicycle Company (BBC) is a mid-range full-line bicycle manufacturing company with 40 years’ experience. BBC produced 98,791 units accounting for over $10MM in revenues in 1982, with an expected 100,000 units for the next three years. Distributed exclusively through independently-owned retailers and specialty bicycle shops, BBC bicycles are known for their above-average quality. In May 1983, a rapidly-growing Northwestern discount retail chain, Hi-Valu, approached Suzanne Leister, VP Marketing, and proposed a private-label agreement.

Under this new program, BBC would manufacture the Challenger™ line of bicycles exclusively for Hi-Valu. The Challenger line was to be a low-cost value bicycle, sold at retail prices under BBC’s normal product lines. This would result in expected cannibalization of an estimated 3,000 units but incremental sales of 25,000 units.

The terms of this proposal, however, deviate from standard practice. Hi-Valu insists that the bicycles be sold to them at a price lower than BBC’s normal distributor prices to preserve Hi-Valu’s margins. Further, bicycles would be shipped to Hi-Valu’s regional warehouses on consignment and paid only when 120 days had elapsed or the bicycle was shipped to a Hi-Valu store, whichever occurred first. Payment would then be Net 30 days.

Relevant cost analysis revealed that the Challenger deal could be a lucrative source of incremental revenues, since the 25,000 additional units could be produced during plant slack time; however, as a discount value line, the Challenger program does not align strategically with BBC’s best-cost provider strategy. Further, the initial capital outlay of $787,000 for the project exceeds BBC’s available resources.

CASE ANALYSIS

Statement of the Problem

▪ Should BBC accept Hi-Valu’s offer?

Objectives of the Case

▪ To find ways on how to impede decreasing sales volume of BBC without compromising the way it does business

▪ To find ways on how to continue producing existing product line – may not be the exact model but at least bearing the make and image of BBC bicycles (not top of the line but above average in quality and price)

▪ Two or more alternative choices of action are specified, and the manager chooses one that he or she believes to be the best

o Accepting the proposal of Hi-Valu or rejecting it and just continue with existing business

§ Opportunity Cost

▪ A measure of the value that is lost or sacrificed when the choice of one course of action requires giving up an alternative course of action

o If Hi-Valu’s proposal is accepted, this would mean that BBC will have to adhere to the product specifications and inventory requirements of Hi-Valu – some existing materials used for BBC bicycles (specifically for the fender, seat, handlebar, tire and packaging) will no longer be used

§ Sunk cost

▪ Cost that has already been incurred and therefore cannot be changed by any decision currently being considered

o The cost of the machines to be used to make the materials or assemble them has already been incurred whether or not BBC accepts Hi-Valu’s proposal.

Areas for Consideration

▪ Hi-Valu would hold the units on consignment in its own warehouses and withhold...

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BaldwinBicycleCompany (BBC) is a full-line bicycle manufacturing company with 40 years of experience. In 1982, BBC has revenue of over $10M for 98,791 units produced. BBC exclusively distributes through independently-owned retailers, their bicycles are known for their above-average quality.
In May 1983, a rapid-growing Northwestern discount retail chain, Hi-Valu, Suzanne Leister, VP Marketing, proposed a private-label agreement.
Under this program, BBC would manufacture the Challenger line of bicycles exclusively for Hi-Valu. The Challenger line was to be a low-priced value bicycle, sold at retail prices under BBC’s normal product lines.
Statement of the problem:
What is the overall impact to the company if BBC will accept the proposal in terms of?
a.) PROFIT
b.) RETURN ON SALES
c.) RETURN ON ASSETS
d.) RETURN ON EQUITY
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1. To be able to show and analyze the proposal depending on the result which will be used to serve as a basis for making decisions.
2. To determine the total relevant cost in producing additional orders for Hi-Valu.
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